Last week during the earnings call, Apple (AAPL) disclosed a cash balance of $97.6 billion dollars, surprising investors and renewing calls for a dividend or share buyback. There are some problems which restrain Apple from effectively deploying a good chunk of cash. Of the $97.6 billion, $64 billion is offshore and would be subject to a 35% tax if brought back to the US. If all the cash was brought back the tax bill would be approximately $22.4 billion dollars and losing that much money to taxes is not an effective use of cash.
The overseas cash comes with another problem for Apple. Sales in China are exploding and the iPhones and iPads are now available around the world. Cash flow from overseas will rise at a faster rate than US cashflow creating a quandary for Apple.
Apple has roughly 932 million shares outstanding and with a share price sitting near $450 per share, a stock buyback would not be the best use of cash, especially since most of the cash sits offshore.
A dividend is a better option as Apple could decide to pay a dividend representing a 1% yield at a cost of roughly $4.5 billion per year. The required cash could come from the onshore accounts without having to bring any offshore cash back onshore.
The final option would be a stock split maybe on the level of 10:1 to bring the share price down to a reasonable range. When stock prices get into the hundreds of dollars per share it tends to turn off investors causing the stock price to lag and become undervalued relative to peers. A large stock split would allow the stock price to get back into the hands of the mainstream investor and start a buying spree that would push the price up by at least 25%.
Do they continue to build overseas reserves and only move back what needs to be moved back or do they choose to move back a large portion, pay a tax, and return more capital to shareholders in the form of buybacks and/or dividends?
Looking at the options, the best choice for Apple right now would be to implement a stock split along with a dividend somewhere in the 50 to 75 basis point range. Apple could go much higher with the dividend but that would entail moving their cash back onshore and subject it to high taxes.
The biggest issue Apple faces may not be how much to pay out in dividends but how to manage the onshore/offshore tax risk in lieu of cash needed to fund US operations, dividends, and share buybacks. The dividends will come but they are likely to be less than expected as Apple manages this tax issue with respect to their cash.
Disclosure: I am long AAPL.